Woolies on track

In our last issue, we talked about defensive stocks and Woolies certainly falls into this category - people will always have to clothe themselves and buy food. The ongoing growth of its businesses, the development of new retailing concepts and a focus on improving customer service (more staff on the floor and extended trading hours) should help to underpin growth in sales and profitability in the medium term. The recent announcement of a deal to sell banking products through Woolworths stores' is also good news. Tesco in the UK started this some years ago with much success. We expect Coles to follow suit.

12-month outlook

Sales for the 12 weeks to June 28 were up by 8.1% on last year. The question is whether margins have been maintained. A net profit for the year just finished is likely to be around $300 million, compared with our previous estimate of $285m. Until we have a better idea of what lies ahead we'll leave our FY99 net profit estimate of $315m unchanged as it is obviously heavily dependent on consumer spending patterns during this period. Historically, consumer confidence has waned in federal election years so this may have an impact.

Nevertheless, Woolworths is a top quality company. Its food business can grow aggressively at profitable margins and its general merchandise, electronics and apparel businesses are all well positioned and have solid medium-term growth prospects.

Apart from our concerns over consumer confidence and the possibility of growth initiatives (including its move into wholesaling and its focus on customer service) negatively impacting margins during a period where sales growth could be under pressure, we remain comfortable about the company's medium term prospects. WOW will always be seen as a defensive stock and a safe haven during times of economic uncertainty. ACCUMULATE at current levels and buy on any weakness as a medium term investment.